Chapter 8
Net assets is the term used to describe ______.
assets minus liabilities
Miss Hap, the bookkeeper, forgot to record the depreciation for the year. This error will cause ______. (Check all that apply.)
assets to be overstated stockholders' equity to be overstated
The journal entry to record amortization expense includes a ______ to Amortization Expense.
debit
The estimated useful lives utilized by a company may be found ______.
in the notes
Which of the following will result in the recording of goodwill?
Company A purchases Company B and pays more than the fair value of Company B's assets and liabilities.
Which of these depreciation methods are allowed by GAAP? (Select all that apply.)
Units-of-production Declining-balance Straight-line
Ace Electronics is disposing of a machine that it no longer needs. After Ace has made an entry to update depreciation expense, Ace should ______.
calculate and record any gain or loss on disposal
If an airline were to increase the estimated useful life of its aircraft, then ______. (Check all that apply.)
depreciation expense will decrease net income will increase
Which of the following statements are true? (Check all that apply.)
Impairment loss on an asset arises from a precipitous decline in the current value of the asset. Depreciation of a truck equals the decline in the estimated usefulness of the truck.
Which depreciation method does not use an asset's residual value to calculate depreciation expense?
Declining-balance
What is the effect of an impairment loss on the accounting equation? (Check all that apply.)
It decreases total stockholders' equity. It decreases total assets.
Which of the following expenditures of a US pharmaceutical company would not be capitalized? (Check all that apply.)
Research costs Development costs related to new untested drugs
Deferred tax liability is recorded when ______.
a company reports more depreciation (and less income tax) on its tax return than it reports on its income statement prepared under GAAP
If a company wants exclusive rights to artistic material, it should purchase ______.
a copyright
Daily Kneads, Inc. spent $400,000 researching and developing new production processes. The entry to record the $400,000 expenditure will cause ______. (Check all that apply.)
assets to decrease stockholders' equity to decrease
GAAP require assets be reviewed for impairment ______.
at least once a year
The journal entry to record the amortization of an intangible asset includes a ______.
debit to Amortization Expense
A is an exclusive right to a special name, image or slogan.
trademark
Lubez, Inc. purchased mineral deposits for $1,000,000 by issuing an $800,000 note and paying the remainder in cash. The entry to record the purchase of the natural resources includes a ______.
$1,000,000 debit to Mineral deposits (an asset)
On January 1, 2018, X-it Company bought a new delivery truck for $30,000. X-it plans to use the truck for 4 years, after which it will be sold for $6,000. Depreciation Expense for 2018 using double-declining-balance equals ______.
$15,000
Dew Drop Inn sold 10 beds that had originally cost $500 a piece for a total of $1,200 cash. The depreciation recorded on the beds at the time of sale equals $4,000. The entry to record the sale includes a ______. (Check all that apply.)
$200 credit to Gains $4,000 debit to Accumulated Depreciation $5,000 credit to Furniture $1,200 debit to Cash
On January 1, 2018, X-it Company bought a new delivery truck for $30,000. X-it plans to use the truck for 4 years, after which it will be sold for $6,000. Depreciation Expense for 2019, the 2nd year of use, using double-declining-balance equals ______.
$7,500
Which of these are long-lived productive assets? (Check all that apply.)
.Delivery equipment .Machinery
Which of these are tangible assets? (Check all that apply.)
.Parking lots for customers to use .Factory buildings .Machinery .Cash registers
X-it Company bought a new delivery truck. The manufacturer says that the truck should last for ten years and 120,000 miles. X-it plans to use the truck for 4 years, during which it will be driven 50,000 miles. What is the useful life of the truck for depreciation purposes? (Check all that apply.)
4 years 50,000 miles
Given each of the following start-up companies are identical except for the depreciation methods and estimates used, which company would report the higher net income in the first year?
Company B used straight-line and estimated useful lives of 5 years and $1,000 residual values.
In accordance with US Generally Accepted Accounting Principles, which of the following costs associated with long-lived assets are expensed, not capitalized? (Check all that apply.)
Interest on loans to purchase the assets Immaterial repairs and maintenance Ordinary repairs and maintenance
Match the different stages of a company's natural resources with the proper financial statement classification for each stage.
Original cost of the natural resource=Long-term Asset Amount of natural resource depleted=Inventory Amount of natural resource matched with related revenues: Cost of goods sold
Why might a company dispose of a long-lived tangible asset? (Check all that apply.)
The asset has reached the end of its useful life. The asset is replaced with a newer, more efficient model. The company doesn't need the asset anymore. The asset was seriously damaged.
Why can depreciation expense be a different amount each year using the units-of-production method?
The method calculates expense based on the relationship between each year's output and total estimated output.
Which of these are natural resources that are depleted over time? (Check all that apply.)
Timber Natural gas wells
True or false: Although depreciation is considered a noncash expense, depreciation expense is a deductible expense that may help to reduce the amount of cash paid for taxes.
True
True or false: Assets are reviewed for impairment at least annually.
True
When a company reports more depreciation (and less income tax) on its tax return than it reports on its income statement prepared under GAAP then ______.
a deferred tax liability is recorded
If Company A is providing services using Company B's name and conforming to Company B's standards and stipulations, then Company A purchased ______.
a franchise
A is the exclusive rights to artistic material.
copyright
MACRS is similar to the ______ method of depreciation.
declining-balance
In accordance with the expense principle, the term describes the process of expensing natural resource's cost in the period related revenues are earned.
depletion
Straight-line, units-of-production, and declining-balance are commonly used methods. (Enter only one word per blank.)
depreciation
The rules to account for long-lived asset values are ______.
different under GAAP (than under IFRS), which require assets be valued at cost and not fair value
Trademarks ______.
have an unlimited life and hence are not amortized
Depreciation and impairment are different in that only ______.
impairment represents the decline in the current value of the related asset
Depletion is ______. (Check all that apply.)
in accordance with the matching principle calculated using the units-of-production method a process used to allocate the cost of natural resources to Inventory as the resource is extracted or harvested
The total cost of the purchase of undeveloped land ______.
includes the cost plus all other incidental costs such as title fees
Lox, Stock and Bagel, Inc. buys Cream Cheesery, Inc. for $1,000,000. Cream Cheesery's net assets are valued at $800,000 at the time of the cash sale. Lox, Stock and Bagel, Inc. should record a(n) ______. (Check all that apply.)
increase to Goodwill of $200,000 decrease to Cash of $1,000,000
When a company capitalizes a cost, its ______ increase.
long-lived assets
A category of long-lived assets that are depleted over time is ______.
natural resources
Goodwill equals the purchase price minus the fair market value of the purchased company's ______.
net assets which is its assets minus liabilities
The write-down due to impairment will cause ______. (Check all that apply.)
net income to decrease intangible assets to decrease
Maxim, Inc. changed its depreciation method from units-of-production to straight-line. Maxim is ______.
only allowed to make this change if it can show the change results in a better measure
An intangible asset may be recorded only if ______.
purchased
If a depreciable asset is expected to be used evenly over its useful life, then management should choose which method?
straight-line
The "least and latest rule" is ______.
that a taxpayer should pay the least tax legally permitted at the latest date allowed
True or false: A company is only allowed to change depreciation methods if it can show the change results in a better measure of the company's periodic income.
true
Natural resources are first recorded as ______, then recorded as ______ when extracted; and lastly recorded as ______ when sold.
Fixed Assets; Inventory; Cost of Goods Sold
Vango, Inc. sold its van for $10,000 cash. The van's original cost was $40,000, and its accumulated depreciation was $32,000. When recording the sale, Vango should record a ______.
Gain on Disposal of $2,000
If a company buys another company and pays more than the fair market value of the other company's net assets, then it will debit ______.
Goodwill
When does impairment occur?
When the future cash flow expected from using an asset is less than the asset's book value
The sale of its intangible asset, trademark, is considered a(n) ______.
investing activity because the purchase and sale of assets that benefit the company for more than one year are classified as such
An impairment loss is a(n) ______.
is a reduction to net income on the income statement
True or false: MACRS is not GAAP.
true
Most companies use one method of depreciation for financial reporting and a different method for income taxes, which requires ______ sets of accounting records.
two
To record the disposal of a long-lived asset, a company must first ______.
update Depreciation expense to the date of sale
Sony, Inc. spent $1,000,000 of development cost for commercially feasible prototypes. If Sony follows IFRS, then the $1,000,000 would ______.
be recorded as an asset
Thermal, Inc. bought a new office computer for $5,000 cash. The journal entry to record this transaction will include a $5,000 ______. (Check all that apply.)
credit to Cash debit to Equipment
The entry to record the depletion of natural resources extracted causes a(n)
increase in one asset and a decrease in another asset
A company should depreciate a long-lived tangible asset to ______.
match part of the cost of the asset with the revenues generated by the asset
On January 1, 2018, Whittle, Inc. purchased timber rights for $2,000,000, which are expected to produce a total of 2,000,000 cords of wood over 4 years, after which it will be sold for $500,000. The cords of wood cut were 200,000 in 2018 and 280,000 in 2019. Depletion for 2018 equals ______.
$150,000
Four years ago, on January 1, California Creamery bought a new delivery truck for $30,000. The company planned to use the truck for 7 years, and then sell it for $2,000. The company used the truck for 4 years and properly recorded straight-line depreciation each year. At the beginning of the 5th year, a change in emissions standards made the truck illegal in California. The company expects to sell the truck outside of California later this year for $6,000. The company should record a journal entry that includes a(n) ______. (Check all that apply.)
$8,000 debit to Impairment Loss $8,000 credit to Truck
Acme, Inc.'s balance sheet shows Equipment at a cost of $5,000,000. Accumulated Depreciation is $2,000,000. Acme's income statement shows Depreciation Expense of $200,000 for the year. The equipment has $0 salvage value. Which of the following statements is true?
40% of the equipment's economic benefits have been used up so far.
Which of the following result in an increase to intangible assets? (Check all that apply,)
A company purchased a franchise for $100,000. A company purchased another company for $10,000 more than its net assets. $10,000 was spent to purchase a patent.
Why would public companies use two sets of accounting records that have different net income?
Because the GAAP rules differ from the Internal Revenue code, two sets may be needed.
Barclay, Inc. sold equipment that originally cost $30,000 four years ago for $8,000 cash. The equipment had accumulated depreciation totaling $24,000. How will this transaction be listed in the investing activities section of Barclay's statement of cash flows?
Cash inflow of $8,000
Which of these is an accelerated depreciation method?
Declining-balance
Which of the following statements best describes the reason depreciation expense is added to net income when preparing the statement of cash flows?
Depreciation Expense originally reduced net income, but the expense does not involve paying cash.
Which of the following statements is correct?
Depreciation is not intended to report an asset at its current value.
Which of the following changes in estimates may cause net income to differ? (Check all that apply.)
Estimated residual values Estimated useful lives
Which of the following may lead to a revision of an estimate of a company's depreciation expense? (Check all that apply.)
Extraordinary repairs that significantly extend the asset's usefulness A change in the estimated residual value A change in the estimated useful life
A company might record an involuntary disposal of an asset ______.
if the asset was seriously damaged in a fire
The sale of property, plant, and equipment results in a cash (inflow/outflow) to the activities section of the statement of cash flows. (Enter one word per blank.)
inflow, increase, addition, or gain investing
The rule that a taxpayer should pay the least tax legally permitted at the latest date allowed is called the ______ rule.
least and the latest
If Company A is granted permission to provide cable services to a particular area, then Company A purchased ______.
license or operating rights
Vango, Inc. sold its van for $6,000 cash. The van's original cost was $40,000, and its Accumulated depreciation was $32,000. When recording the sale, Vango should record a ______.
loss of $2,000
Gains on the sale of fixed assets are recorded with a credit and occur when the book value is than the sales price. (Enter one word per blank.)
lower, less, smaller, lesser, or below
On-a-Roll, Inc. amortizes its copyright of $20,000 over 20 years. Miss Hap, the bookkeeper, forgot to record the amortization in the current year. The effect of this mistake causes ______. (Check all that apply.)
net income to be overstated assets to be overstated
Intangible assets with unlimited or indefinite lives are ______.
not amortized, but instead are reviewed for impairment
A gain on the disposal of an asset occurs when the ______.
selling price is greater than the asset's book value
On January 1, 2018, MachX, Inc. paid $45,000 for a machine and uses straight-line depreciation with an estimated useful life of 5 years and a $5,000 residual value. In 2019, MachX decided that the machine's original estimated useful life of 5 years should be revised to a total of only 3 years with a $1,000 salvage value. The revised depreciation expense for the year ended December 31, 2019 equals ______.
$18,000
Acme, Inc. bought land and a factory building for $80,000. The land was appraised at $25,000 and the building at $75,000. Acme would record the land at ______ and the building at ______.
$20,000; $60,000
Dew Drop Inn sold 10 beds that had originally cost $500 a piece for a total of $800 cash. The depreciation recorded on the beds at the time of sale equals $4,000. The entry to record the sale includes a ______. (Check all that apply.)
$5,000 credit to Furniture $200 debit to Losses $800 debit to Cash $4,000 debit to Accumulated Depreciation
Assuming straight-line is used, which of the following is the depreciation formula for the revision of an estimate?
(Book value-new residual value) x (1/remaining life)
During the year, both Company A and Company B purchased similar long-lived assets that cost $100,000. Company A used straight-line and Company B used double-declining balance. Given net income before depreciation is the same, which company would report the higher net income after depreciation?
Company A
IFRS and GAAP rules to account for long-lived asset values differ in that ______. (Check all that apply.)
IFRS allow development costs to be capitalized IFRS allow asset values to be increased to fair values
The write-down of goodwill for impairment will affect which of the following financial statements? (Check all that apply.)
Income statement Balance sheet
A debit to _____ is recorded if a company is granted permission to provide exclusive services to a particular area.
License and operating rights
Squid Roe, Inc.'s $48,000 sushi bar was originally expected to be used for 8 years with no residual value. Depreciation on the bar was $6,000 per year for the past 2 years. In the 3rd year, management changed the estimated life of the bar to be a total of only 6 years instead of 8. What should Squid Roe do?
Revise the depreciation expense to be $9,000 for years 3 through 6.
Why does the IRS allow larger depreciation amounts in the early years of an asset's life?
The government wants to encourage companies to invest in assets to promote economic renewal and growth.
Which of the following financial statement totals are reduced by the adjusting entry to record amortization? (Check all that apply.)
Total assets on the balance sheet Total stockholders' equity on the balance sheet Net income on the income statement
Declining-balance depreciation methods are also called depreciation methods.
accelerated
Under IFRS, the cost of a long-lived asset is ______.
allocated among the asset's significant components and then depreciated separately
The proper accounting for natural resources is to record the original cost as an ______.
asset, then later transfer amounts to Inventory as the resource is depleted, and finally expense the cost as the resources are sold
Under IFRS, if a company spent money on the development of a commercially feasible prototype, then the cost would ______.
be recorded as an asset
IFRS depreciates a long-lived asset ______.
by allocating its cost among its significant components and using different useful lives for each component
Quiche & Tell, Inc. has discovered that its goodwill has been impaired because the secret recipe it received when it purchased its competitor is no longer a secret. This impairment will ______.
cause a decrease in stockholders' equity
The notes in the annual report, which follow the financial statements, should be reviewed to determine whether a company that follows IFRS chose to record its tangible and intangible assets at historical or value. (Enter only one word per blank.)
cost fair or market
The Mane Event, Inc. sold its barber chair for $500. The chair's original cost was $1,200, and its accumulated depreciation was $800. When recording the sale, Mane Event should ______. (Check all that apply.)
debit Cash for $500 credit Gain of Sale of Assets for $100 debit Accumulated Depreciation for $800 credit Furniture for $1,200
Potients, Inc. amortizes its patents over ten years. The entry to record the amortization of its patents may include a ______. (Check all that apply.)
debit to Amortization Expense credit to Patents (or Accumulated Amortization)
The journal entry to record Pulpit, Inc.'s depletion of its timberlands for the accounting period includes a ______.
debit to Inventory
Which of the following are acceptable depreciation methods for financial reporting purposes? (Check all that apply.)
declining balance units-of-production straight-line
A purchase of an intangible asset results in a(n) (increase/decrease) to net cash flow provided by activities. (Enter one word per blank.)
decrease investing
On-a-Roll, Inc. amortizes its patent of $20,000 over 20 years. The adjusting entry to record amortization results in a(n) ______. (Check all that apply.)
decrease to net income on the income statement decrease to assets on the balance sheet
Morris Lest, Inc. sold its truck and received less cash than the truck's book value. The net effect of this sale on the accounting equation is a(n) ______. (Check all that apply.)
decrease to stockholders' equity decrease to assets
MACRS is a(n) ______.
depreciation method approved by the IRS that yields high depreciation expense in the early years an asset is used
Technology intangible assets include costs incurred to ______. (Check all that apply.)
develop Web designs internally develop software internally
True or false: A company may record an asset called Goodwill if it has developed a brand new product.
false
True or false: Companies are required to use the same depreciation method for both financial accounting and federal income tax reporting.
false
True or false: GAAP require management to select an accelerated depreciation method if the long-lived asset produces more revenue in its early years than in its later years.
false
True or false: The IRS requires a company to depreciate its assets using MACRS so that it will collect more income taxes, especially in the early years of the assets' lives.
false
Depreciation ______. (Check all that apply.)
for financial reporting purposes is not a source of cash for tax reporting purposes can affect a company's cash flow is a noncash expense
A is granted by Company X to Company Y when Company Y provides services using Company X's name and conforms to Company X's standards and stipulations.
franchise
Anudu, Inc. sold equipment and received more cash than the equipment's book value. The effect of this sale on the accounting equation includes a(n ______. (Check all that apply.)
increase to assets increase to stockholders' equity
Technology intangible assets are reported if a company has ______.
internally developed software
Keeping two sets of books _______. (Check all that apply.)
is legal is ethical means the same transactions will be included in both but may accounted for differently
A higher residual value will result in a(n) depreciation expense per year and a(n) net income.
lower, smaller, decreased, lesser, reduced, less, low, or decreasing higher, larger, greater, bigger, increased, high, or increasing
Depreciation Expense is added back to net income when preparing the cash flow from operating activities section because depreciation represents a(n) ______ reduction to net income.
noncash
Research and development costs are ______. (Check all that apply.)
not capitalized because of uncertainty expensed when incurred incurred to construct or internally develop intangible resources
A gives a company exclusive rights to a manufacturing process.
patent
If a company wants to receive exclusive rights to a manufacturing process, it should purchase a ______.
patent
An intangible asset may be recorded when a company ______. (Check all that apply.)
purchases a trademark pays more than the net assets of the company purchased
On January 1, 2019, Whittle, Inc. purchased timber rights for $2,000,000 which is expected to produce a total of 2,000,000 cords of wood over 4 years, after which it will be sold for $500,000. The cords of wood cut were 200,000 in 2019. The effect of recording the 2019 depletion (not the sale of the wood) on the accounting equation is ______. (Check all that apply.)
the asset, Inventory, is increased the asset, Timberland, is decreased
Exclusive rights to a special name, image or slogan is a ______.
trademark
On January 1, 2018, Busy Beaver, Inc., signed a $315,000, 5-year note payable to buy a new industrial veneer cutter. Busy Beaver plans to use the machine for 10 years and then sell it for its scrap value of $5,000. Using straight-line depreciation, Depreciation Expense for the year ended December 31, 2018 equals ______.
$31,000
X-it Company, signed a $500,000, 5-year note payable to buy a new industrial machine. The company paid $2,000 cash for transportation of the machine and $1,000 cash for installation costs. The journal entry to record this transaction will include a ______. (Check all that apply.)
$503,000 debit to Machinery $500,000 credit to Note Payable $3,000 credit to Cash
What is the formula for calculating double-declining-balance depreciation?
(Cost - Accumulated Depreciation) x (2/useful life)
Which of these are major types of long-lived assets? (Check all that apply.)
.Tangible assets .Intangible assets
A company bought land and a building for $128,000. The building has a useful life of 20 years. Why should the company split the $128,000 cost between the land and the building?
Land is not depreciated, while the building will be depreciated over its 20-year useful life.
Why should a company divide up the cost of a "basket purchase" among the different assets purchased?
The different assets might be depreciated over different useful lives.
The amount recorded for the purchase of long-lived tangible assets is the ______. (Check all that apply.)
acquisition cost cash equivalent price net cash equivalent amount paid or to be paid
Tangible assets are first recorded at ______.
all costs to acquire them and prepare them for use
When equipment is purchased using noncash assets, the equipment is recorded as ______.
an asset at its cash equivalent price
If a cost is capitalized, it is recorded as a(n) not an expense. (Enter only one word per blank.)
asset
An asset's cost minus accumulated depreciation is its ______ value.
book
Improvements that increase the productive life, operating efficiency, or capacity of a long-lived asset are ______.
capital expenditures and debited to the respective long-lived asset
All costs to get an asset in place and ready for its intended use should be ______.
capitalized
Sunny Skys, Inc. bought a derelict hunting lodge, which it tore down at a cost of $45,000 and replaced with a new lodge. The demolition cost should be ______.
capitalized
An asset's book value or carrying value is its ______.
cost minus accumulated depreciation
Depreciable cost equals an asset's _______.
cost minus its residual (or salvage) value
A(n) ______ fixed asset turnover ratio suggests a better than average use of fixed assets.
higher
When using units-of-production depreciation, if the actual output differs from the estimated amount then ______.
the final adjusting entry will record the effect of the difference
Which of the following are needed to calculate depreciation expense? (Check all that apply.)
useful life salvage value acquisition cost
Depreciation expense is an estimate because it is based on the asset's estimated ______. (Check all that apply.)
useful life to the company residual value
Depreciation expense is an estimate because it is based on the asset's estimated and (Enter only one word per blank.)
useful or economic life residual or salvage
True or false: Depreciation is not intended to report an asset at its current value.
True
The asset's book value (or cost minus accumulated depreciation) must equal its residual (salvage) value at the end of its useful life using which depreciation method? (Select all that apply.)
Units-of-production Straight-line Double-declining-balance
Identify the amounts required to calculate the depreciation of an asset. (Check all that apply.)
estimated residual value at the end of the asset's useful life acquisition cost estimated useful life to the company
Recording depreciation is an application of the principle. (Enter one word per blank.)
expense
Recording depreciation is an application of the ______.
expense principle
Which of the following costs incurred due to the construction of a building would be capitalized as part of the cost of the building? (Select all that apply.)
materials labor interest on construction loan
If a company were to purchase inexpensive wastebaskets that are expected to be used for 3 years, the company ______.
may choose to expense the wastebaskets in the period purchased
Which of the costs associated with the purchase of undeveloped land would be debited? (Check all that apply.)
sales commissions survey fees title fees
Another term for residual value is value. (Enter only one word per blank.)
salvage, scrap, or resale
((Cost-residual value)/estimated total production) x actual production this period is the formula for calculating ______ depreciation.
units-of-production
WorldCom improperly capitalized costs that should have been expensed. The effect of this fraud on its accounting equation resulted in ______. (Check all that apply.)
stockholders' equity being overstated assets being overstated
(Cost - residual value) x (1/useful life) is the formula for calculating the - method of depreciation. (Enter only one word per blank.)
straight line
Which account is credited in a journal entry to record depreciation on machinery?
Accumulated Depreciation
Which of the following is true?
Capitalized costs increase long-lived assets.
On January 1, 2015, X-it Company bought a new delivery truck for $30,000. X-it plans to use the truck for 4 years, after which it will be sold for $6,000. Depreciation expense for 2018, the fourth year of use, using double-declining-balance equals ______.
$0
On January 1, 2017, X-it Company bought a new delivery truck for $30,000. X-it plans to use the truck for 4 years, after which it will be sold for $6,000. Depreciation expense for 2019, the third year of use, using double-declining-balance equals ______.
$1,500
Which financial statement shows tangible assets?
Balance sheet
Ace Electronics bought a new cash register for $2,500. Ace plans to use the cash register for 4 years and then sell it for $200. The cash register's depreciable cost equals ______.
$2,300
Sunny Sky bought a $30,000 piece of land to be used for a new corporate headquarters building in exchange for 1,000 shares of $1 par value common stock with a market value of $30 per share. The journal entry to record this transaction will include a ______. (Check all that apply.)
$30,000 debit to Land $29,000 credit to Additional Paid-in Capital $1,000 credit to Common Stock
On January 1, 2018, Ace Electronics bought a new cash register for $2,500. Ace plans to use the cash register for 4 years and then sell it for $200. If Ace uses straight-line depreciation, depreciation expense for the year ended December 31, 2018 equals ______.
$575
Shenandoah Skies built a new lodge for its ski resort. Which of the following costs should be capitalized? (Check all that apply.)
$7,000 in architect fees $70,000 cost of lumber to build the lodge $4,200 paid in sales tax on the lumber to build the lodge
What is the formula for calculating units-of-production depreciation?
((Cost-residual value)/estimated total production) x actual production this period
The formula for calculating straight-line depreciation is ______.
(cost - residual value) x (1/useful life)
Ace, Inc. just bought a new delivery truck. Which of these costs should be capitalized? (Check all that apply.)
.The $25,000 cost of the truck .The $2,000 paid to install shelves inside the truck
Acme Enterprises just bought a new manufacturing machine. Which of these costs should be capitalized? (Check all that apply.)
.The $500,000 invoice price of the machine .The $15,000 freight bill to deliver the machine to Acme's factory .The $8,000 cost of tearing down Acme's factory wall to get the machine inside
Sunny Sky paid $30,000 cash for a piece of land to be used for a new corporate headquarters building. The journal entry to record this transaction will include a $30,000 ______. (Check all that apply.)
.debit to Land .credit to Cash
Long-lived assets are ______. (Check all that apply.)
.used by the business .assets acquired for use over 1 or more years
Miss Hap, the company bookkeeper, recorded the annual repair costs on the company's machinery as an increase to the machinery account. As a result, which of the following is true? (Check all that apply.)
Assets will be overstated. Stockholders' equity will be overstated.
interest is the amount of interest costs that is debited to the asset that is being constructed and credited to Cash when the interest is paid.
Capitalized
Why is the straight-line method of depreciation called "straight-line"?
Depreciation expense is a constant amount each year, so a graph of depreciation expense over time is a straight line.
True or false: In accordance with US Generally Accepted Accounting Principles, a company will always capitalize the cost of a long-lived asset.
False
True or false: When equipment is purchased by issuing stock, no entry is recorded because it is a noncash acquisition.
False
Which lease contract would result in a debit to a long-term leased asset and liability?
Financing lease
Both Spam Am Airlines and TWB Airlines used straight-line depreciation for a $20 million jet. Spam Am used an estimated 35 year useful life and TWB Airlines used an estimated 25 year life for its planes but estimated similar residual values. As result of the differences in useful lives, which company will appear more profitable?
Spam Am
Match each depreciation method with the applicable description.
Straight-line depreciation matches Choice Does the best job of matching the expense with the related revenue when an asset is used evenly over its useful lifeDoes the best job of matching the expense with the related revenue when an asset is used evenly over its useful life Units-of-production depreciation matches Choice Is the best method to use when the amount of an asset's use varies significantly from one accounting period to anotherIs the best method to use when the amount of an asset's use varies significantly from one accounting period to another Declining-balance depreciation matches Choice Is the best method to use when an asset is productive in its earliest years but quickly loses its usefulnessIs the best method to use when an asset is productive in its earliest years but quickly loses its usefulness
The old Metropolitan Theater, which had been unused for years, was purchased for $1, renovated at a cost of $3.5 million, and then reopened for business. The renovation cost should be ______.
The old Metropolitan Theater, which had been unused for years, was purchased for $1, renovated at a cost of $3.5 million, and then reopened for business. The renovation cost should be ______.
How does management estimate useful lives and residual values?
They use professional judgment.
Busy Beaver, Inc. signed a $315,000, 5-year note payable to buy a new $315,000 industrial veneer cutter. Busy Beaver paid $5,000 cash for transportation of the machine and $750 cash for installation costs. What is the overall effect of this transaction on the accounting equation? (Check all that apply.)
Total assets increase $315,000. Total liabilities increase $315,000. Machinery, an asset, increases $320,750.
X-it Company signed a $500,000, 5-year note payable to buy a new machine. The company paid $2,000 cash for transporting and $1,000 cash for installing the machine. What is the effect of this transaction on the accounting equation? (Check all that apply.)
Total assets increase $500,000. Total liabilities increase $500,000. Machinery, an asset, increases $503,000.
Executives at WorldCom committed an $11 billion fraud by capitalizing costs that should have been expensed. What was the effect of this fraud on WorldCom's financial statements? (Check all that apply.)
Total assets were too high. Net income was too high. Retained earnings were too high.
To determine the approximate age of a noncurrent depreciable assets remaining life, ______.
divide the book value by the original cost
Long-lived tangible assets are typically found on the balance sheet ______.
grouped together as a single line item called Property, Plant and Equipment
Mr. Fixit, Inc.'s fixed asset turnover was 3.0 in 2019 and 2.4 in 2018. This increase in its fixed asset turnover may indicate that the company ______. (Check all that apply.)
had a greater increase in sales relative to its fixed assets used its fixed assets more efficiently
The declining-balance depreciation method assigns a(n) depreciation expense to the early years of asset ownership.
higher, greater, larger, bigger, high, large, accelerated, or increased
The fixed asset turnover ratio is used to evaluate ______.
how well management uses long-lived tangible assets to generate revenues
A company may make an exception to the accounting rules and not capitalize a long-lived asset if its cost is . (Enter only one word per blank.)
immaterial, insignificant, small, low, minimal, or negligible
Capitalized costs differ from expenses in that only capitalized costs result in a(n) ______.
increase to long-lived assets
An asset's useful life ______. (Check all that apply.)
is the asset's expected economic life to its owner can be expressed in either years or units
Vango, Inc. depreciates its truck using units-of-production based on miles. Vango drove its truck 50,000 miles in year 1 and 70,000 miles in year 2. Depreciation expense will be ______ in year 1 compared to year 2.
lower
Assuming straight-line depreciation is used, a higher estimated useful life will result in a(n) depreciation expense per year and a(n) net income. (Enter one word per blank.)
lower, smaller, decreased, decrease, low, understated, lesser, less, reduced, or declining higher, larger, bigger, greater, increased, increase, high, or rising
The estimated output used to calculate depreciation expense will often differ from the actual output. The proper accounting for any difference is to ______.
make the final adjusting entry to depreciation expense be such that the net book value equals the residual value
If a company records an expense as a capital expenditure, then ______.
net income will be overstated
Short-term operating leases differ from financing (or capital) leases in that operating leases are ______.
not reported on the balance sheet as liabilities
Thermal, Inc. bought a new computer system for $50,000 cash. What is the effect of this purchase on the company's total assets? Total assets ______.
remain the same
The costs of a new building that is currently under construction, not for sale but for a company's own use, are ______.
reported on the balance sheet as a noncurrent asset
The straight-line depreciation method ______.
reports an equal amount of depreciation expense each year
Land improvements reported on a company's balance sheet might include ______. (Check all that apply.)
sidewalks outside the corporate headquarters trees planted to provide shade for the customer parking lot the fence around a factory parking lot
An asset's residual value is ______. (Check all that apply.)
the same as its salvage value the estimated amount it can be sold for at the end of its useful life
